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I’m thinking of buying the 2027 leaps with a delta of about 80 and then selling weekly OTM calls on strength in the stock. When the 2028 leaps come out, I’d roll my leaps to that and keep doing that every year when the new leaps get issued.

I bought one $410 leap on Monday morning for $99.75 and I sold the $470 weekly for $1.30. I figure the weekly will usually expire worthless but when it doesn’t I’ll just roll it up and out to the next week. When I take a loss on the weekly, it will mean that the leap is doing well and I’ll just make back the loss on next week’s call.

I’m just thinking that I can make great returns selling the calls against the cheaper leaps, so I should do ok even in a bear market.

Gosh, that sounds like a lot of work.

Though I admit I have done sort of similar.

I have a bunch of long-term deep in the money calls, which in recent years forms my core long term holding. I roll them every couple of years, just a periodic chore like cleaning the gutters.

Separately (in my mind), when valuations seem high I write some calls. Usually a few months out, fairly close to the money. If the stock price rises more I roll those up and out in a roughly cash neutral way--eventually the stock price peaks and the last round expires. I make no money during the waiting and rolling, but the final round generally gives a nice profit.

Of course, during any moment that both of those things are in effect, and I have written a lot of calls (as now) I'm pretty market neutral: I'm long low-strike calls and short high-strike ones. At any given price (e.g., if the stock price is flattish), the high strike ones make more money each day than the low strike ones lose, so I make money.

Not so different from what you're proposing, just the lazy man's version of it.

A traditional option trader will say that this isn't smart because you have all the downside exposure below the low strike--but in that situation, I don't care about mark-to-market, I'll be too busy out selling a kidney to buy all the stock I can.

Jim

Jim,
If you you have time, could you give a few more details on your approach?
I'm particularly interested in point 6, i.e. the general idea of safely levering up and using part of the 'savings' to buy protective puts and/or something else.

1) Isn't a big point of the strategy the control of shares of BRK with the DITM call, at say 50% of the share cost, i.e. the big point is leverage?
Capturing the sold call premium is pleasant, you indicate you sell calls when BRK seems over-valued, and not continuously.

2) Buy perhaps 50% DITM LEAPS calls?

3) Write perhaps three months out calls, maybe 5% OTM?

4) If stock price rises you roll the sold calls, don't hold to expiration, so try to avoid assignment?
Roll on what criterion? If you were assigned, presumably you'd sell the DITM call to buy the assigned stock?

5) If stock price falls, the sold call premium is kept and the long LEAPS call moves basically dollar for dollar with the stock.

6) One saves roughly 50% if buy a 50% DITM LEAPS call over buying shares outright.
What to do with those saved funds?
- One thought is to buy some protection i.e. buy some puts on BRK.
- If one has good candidates in mind one could diversify into other investments.
- One could stick some or all of it in T-bills to have 'dry powder' to take advanatage of a big market drop, and gain 4% or so interest meanwhile.
- a combination of all of the above

Thanks!

I’m not worried about the work, I have plenty of time for this. The scenario where this doesn’t work is where berk crashes 50%, especially if it’s right after I start doing it, but that’s why I’m choosing this stock. I think it’s relatively safe and will hold up better than others in a bear market.

The scenario where this doesn’t work is where berk crashes 50%, especially if it’s right after I start doing it, but that’s why I’m choosing this stock. I think it’s relatively safe and will hold up better than others in a bear market.

Cherry-picking a start date to show what has happened:

https://stockcharts.com/freecharts/perf.php?SPY,BR...

I abide by this teaching: "I've never believed in risking what my family and friends have and need in order to pursue what they don't have and don't need."

Well said Adrian.

For reinforcement we can go to the late great Charlie Munger: "You only need to get rich once."

One of the many valuable lessons learned during my 30 years of involvement with BRK.

I bought one $410 leap on Monday morning for $99.75 and I sold the $470 weekly for $1.30. I figure the weekly will usually expire worthless but when it doesn’t I’ll just roll it up and out to the next week. When I take a loss on the weekly, it will mean that the leap is doing well and I’ll just make back the loss on next week’s call.

It's not that simple. What if one week you happen to get assigned an exercise of that call you sold? It happens periodically (EVEN for options that don't make sense to exercise financially). So your trade could look like this -

2/3/25 - Buy 100 410 calls at $9975
2/3/25 - Sell 100 470 weekly at $130
2/4/25 - Stock pops to 475
2/5/25 - You wake up to an email that your option was assigned
2/6/25 - You need to deliver 100 shares and will receive $47,000 for them, stock is up to 477 now.

What do you do now? You think that your 2027 LEAP covers it, but it doesn't really. You have two choices:
1. Buy 100 shares for $47,700 and deliver them and receive 47,000. So that weekly call has a loss of $700 (loss on the trade) - $130 (premium received), or $570. That'll eat up the next 5 weeks of weekly call premium!
2. Exercise the LEAP for $410 to get the 100 shares. This would, of course, be an absurd waste of money because you could sell the LEAPs for a lot more net money.

So to determine your expected yield, you need to estimate how many option sales will "fail" (lose) and how many will expire worthless. If throughout the year, 52 weeks, 2 get exercised, 10 fail (lose), and 40 expire worthless, then you need to calculate. The 2 exercises could eat up the gains of say 10 weeks worth plus the two. The failures maybe lose 2x premium (you can decide to buy them back at that point each week) so that eats up another 20 weeks plus the 10. So now you have 52 - 30 - 10, or a net of 12 win weeks. So if you can get $1.30 on average for each of them, you gain $15.60 over the year. Calculating the yield is difficult to impossible because you have to determine which denominator to use. You "invested" $99.75 up front, BUT you also tied up some margin each week with those call option sales. The yield is probably somewhere under 20%. Is it worth it for all that work? 53 trades each year, and determining which ones to trade, and when to trade, and when to bail, and when to rollover, etc. You might even be able to get a similar yield using a LEAP spread of some sort which only involves three trades total in most cases across the entire year.

So is that the biggest drawdown it has had?

So is that the biggest drawdown it has had?

Here's -48% in 2000:

https://stockcharts.com/freecharts/perf.php?SPY,BR...

That one was a big test for me. I was new to investing in 1999, heard about this Warren Buffett guy, read some annual letters, liked what I read, and bought some B's at $2330 (split adjusted $76.66). I kept buying B's all the way down, the last ones for that cycle on 2/29/2000 at $1450 (split adjusted $48.33). Still have them all. 11.9% CAGR for those last ones, only 9.3% for the overpriced first ones. There might be a lesson in there somewhere.

almost identical experience....still have split adjusted $58.83

I rolled to the next weeks $475 when berk was above $470. I forget what the stock price was but I paid a .70 debit when I rolled and I’m sitting on the 2/14 $475 call now.

I’m thinking it would be rare for me to be assigned if I stayed on top of it and rolled quickly before it was deep in the money.

Reading about this kind of strategy reminds me of a post by an Australian investor I followed years ago, until she hung up her skates.

"The Three Worst Investment Strategies Ever"
#2 Writing Puts: The problem with this strategy is that you make a few bucks that you get to keep if you’re right, but you lose your home if you’re wrong. Pretty crap deal, if you ask me. Selling puts for income is the worst strategy ever – you get a pittance every month, and take massive risk to do so. Added to that, the only way to effectively manage that risk is to spend some of that pittance on protection. Awesome. -- www.roguetraderette.com


and

"If you think you've come up with a brilliant idea [for making risk-free money with options]... whatever you think you've discovered is not what it appears to be, and anything that has a slight shred of a chance of being real has already been discovered and exploited by folks way smarter than you at places like Blackrock and Goldman. This will save you lots of pain."

" "If you think you've come up with a brilliant idea [for making risk-free money with options]... whatever you think you've discovered is not what it appears to be, and anything that has a slight shred of a chance of being real has already been discovered and exploited by folks way smarter than you at places like Blackrock and Goldman. This will save you lots of pain."


BINGO< but it's much worse if the option is illiquid, the spreads kill you and the experts trade against your limit orders. I wish a professional option trader joined us decades ago.

Buffett sells puts all the time and that’s not the strategy I’m talking about anyway.

I never said it was risk free or that I came up with it. I just think it would work on this stock🤷‍♀️

The spreads are too wide for my liking but there’s plenty of liquidity in Berkshire options

" The spreads are too wide for my liking but there’s plenty of liquidity in Berkshire options."

That's a fancy way of saying, less than optimum fills. Good luck.

If we have a bear market, this trade would suffer but if the stock is neutral to higher this strategy would work.

The other risk is huge spikes up in the stock. You wouldn’t sell calls over earnings for that reason. This is also why I like using Berkshire with this strategy cause it’s a less volatile stock. You have the risk of assignment but frankly I’m not worried about it. I think I’d almost always roll the call before it got assigned.

I also don’t understand people who think this is a lot of work. Checking in on the stock every day is a lot of work? lol it takes a few minutes.

I’m definitely not worried that it won’t work because I get bad fills.

Selling puts for income is the worst strategy ever

This is absolutely true. And selling [covered] calls for income is similar. That's mainly because options are a zero sum game, and in order to believe that you can gain regular income from options literally means that you believe there is a sufficient supply of people out there willing to give you "free money". In reality, when you sell an option, you are selling a form of insurance, and like most insurance, it is only used rarely. But like most insurance, it is used at times of the highest stress. So by selling options, you are taking on the liability of that extreme stress.

Now, I regularly sell put options, but not for income. I use them as a tool to accumulate stocks that I like at slightly lower prices than currently available. I learned that technique from Apple when, a number of years ago, they used that technique for one of their share buybacks. For example, a number of times in 2023, I sold BRKB puts in an attempt to add to my position. For a few months, my puts were not exercised and the puts expired worthless, and I didn't get to buy those shares, but once, in March I think, my 305 puts were exercised and I got to buy shares at 305. And that was delightful, I still hold all those shares today.

Now back to the "sufficient supply" of less informed people out there. It has been shown that less sophisticated option traders almost always BUY options, while more sophisticated option traders will both buy and sell options. Therefore, I try to position myself on the selling side whenever possible because the odds are higher that I will be trading against someone less sophisticated. And in fact, a couple of months ago, I got really lucky and was assigned an exercise by someone unsophisticated. They exercised an option that would have been better, financially better, to simply be sold, and by doing that, they transferred all the remaining time premium to me instead of to their own brokerage account. But that is pure luck, it doesn't happen often at all. What does happen more often is option exercises across an ex-dividend day to "capture" the dividend, that's happened to me a number of times on the higher strike option of a bull call spread.

And that brings me to spreads. Option spreads are a wonderful way to trade. That's because you can choose LITERALLY any level of risk you please, with the commensurate return for that risk. For example, you can enter into various bull call spreads on Berkshire (B). You might choose a 350/400 June '25 spread which is very likely to expire at full value, but because it is so likely, you will only make a buck or two (on that $48-49 investment). But you can choose a 400/450 spread which is somewhat riskier, and you have the potential of making 4 or 5 bucks. Or you choose something much more risky, and you can buy a 450/500 spread with the potential of making 30 bucks if the stock is at or over 500 by the third Friday in June. And you can choose ANY range, and ANY level of risk, it's a nice tool to use.

Finally, the last part of my story. I started trading options in the 80s. Back then it was a huge pain to trade them, and it was VERY expensive. You had to call the broker on the phone, and you paid HUGE commissions to trade them, and the spreads were usually very wide. I was very long NYA (one of the popular NYSE indexes back then) options and my options portfolio got wiped out on Black Monday in October of 1987. That's when I learned the lessons I mentioned above. Luckily, I was still young at the time, so I was trading with relatively low amounts of money while learning that lesson.

“I regularly sell put options, but not for income. I use them as a tool to accumulate stocks that I like at slightly lower prices than currently available.”

Warren sold puts as well I believe when he happily added to our KO position back in the 80s. I wonder whether he used them when we bought so much OXY so quickly a couple years ago. I think he also said upon reflection, if you really like the business, just buy more of the stock vs. selling puts.

Warren sold puts as well I believe when he happily added to our KO position back in the 80s. I wonder whether he used them when we bought so much OXY so quickly a couple years ago. I think he also said upon reflection, if you really like the business, just buy more of the stock vs. selling puts.

I don't think he used them with OXY but he used short puts a ton to acquire the position in Burlington Northern Santa Fe.

You need to be diversified into some bullish and some bearish positions.

Warren sold puts as well I believe when he happily added to our KO position back in the 80s. I wonder whether he used them when we bought so much OXY so quickly a couple years ago. I think he also said upon reflection, if you really like the business, just buy more of the stock vs. selling puts.

I do the same. When I like a company, I buy the stock. BUT, I don't enter the full position at once, instead I "leg in" over a few weeks/months, so sometimes over the ensuing months, I will use options opportunistically to accumulate more shares at slightly better prices.

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